Whistleblowing Endgame

Asset managers may face a quandary when the SEC is tipped first

The new whistleblowing provisions of the Dodd-Frank Act apply to anyone who can break the federal securities laws, including asset managers and the vendors who supply them with services.

Under the new law, a whistleblower need not report a possible securities law violation to the management of his firm before notifying the SEC. Dodd-Frank also prohibits companies from retaliating against whistleblowers who do not report regulatory problems to management before reporting them to the SEC and from adopting policies which interfere with whistleblowing. On the other hand, employers may reward employees for bringing potential regulatory concerns to their attention before blowing the whistle to the SEC.

If a company were to incentivize employees to notify it of potential violations before the SEC by including prior notice to it as a criterion in its promotion or compensation policies, how could such a company then reconcile its legal obligation not to retaliate against a whistleblower with its policy of rewarding whistleblowers for coming to management first? Any whistleblower who then elects to notify the SEC first would ipso facto lose out on his company’s promotional or compensation reward and arguably have a prima facie case against it for unlawful retaliation.